(This is the 3rd article in the Money 101 Managing Your Money Series. We advise that you start from the the first article in the Series. Please click here to go to the Money 101 Managing Your Money introduction)
One of the hardest things about “managing your finances” is actually getting started down the path. During high school and college, and even after college for most people, finances are mysterious and maddening. There is never enough money!
One way to start down the path of control is to give yourself some sort of incentive to do so. If you feel that you are getting something from planning and managing your finances, then it is much more likely that you will do it.
Determining goals and objectives
By definition, a goal is a goal is a broad over-arching statement of desire such as ‘I want to be financially independent’ while an objective is a definite target that encompasses measurable elements such as ‘Have a net worth of KES 1M by the time I turn 30’ The primary difference between the two is that objectives are measurable while goals tend to be vague.
We frequently like to speak of things as goals because doing so gives them a level of importance. We do not like to think of goals as tasks. Tasks have a somewhat menial “KYM” connotation. To put it another way, we like to have goals; we want other people to have tasks.
In hierarchical planning models, we generally find that goals are fairly easy to enumerate. As a matter of fact, goals are a dime a dozen. One problem is thinking that financial goals are the top of the pyramid of life. Generally, they are not.
If you accept that you have a broadly conceived personal mission statement (whether written or not), it is probably supported by some broadly stated goals. These goals are probably a combination of several different kinds of desires. In fact, achieving the financial side is only part of achieving the goal.
Exercise One: Setting Goals – Where do I wish I was? Where do I want to go?
On a blank sheet of paper, list as many of your desires as you can think of. It may take a few minutes to get started; if you find yourself staring at the blank sheet of paper here are some thoughts to help you get started:
- Do you want or need a new car?
- A new house?
- New furniture?
- An encyclopedia?
- A computer?
- A new spring wardrobe?
- A comfortable retirement?
- A new riding lawn mower?
- A deck or swimming pool?
- A college degree for your kids?
- A trip to Paris?
- An engagement ring for your girl friend?
- No more payments on your credit card?
- To become a millionaire? A billionaire?
Just start imagining all the things you would love to have one day, and write as many of them as you can think of down on the sheet of paper. For most folks, if you think about all of the things you want to have both short- and long-term, you end up with a pretty long list.
| # | My desires | Value | Costs |
Changing words into numbers
Now you have a list. Take another five minutes and write down prices next to everything. If you don’t know the exact number, write down an approximate number. If you don’t know an approximate number, just guess and then double that number.
Putting tentative timelines
Alongside each item on the list that should now have a price or value beside it, write when you would like to have the item. You can use by what age or what year you would like to have the item, then calculate how many years you have till then. For instance, if you are 26 and would like to buy your first house at 30 valued at KES 7 Million, then your list would look like this:
| Own my own home | 7M | By 30 (4 years) |
Once you have the timelines, sort your goals into 3 categories:
- For those within 1 year, put them in the short-term category
- For those to be achieved between 1 and 5 years put them in the mid-term category
- For those over five years, pu them in the long-term category
Some recommended goals:
Savings: The first goal, we believe, should be the creation of an emergency fund. An emergency fund is a pool of cash set aside to tap into in case of emergencies. A good rule of thumb is setting aside 3 to 6 months of your basic living expenses. We discuss emergency funds further Lesson 4 ‘Understanding the tools’ and Lesson 5 ‘ Creating a Plan’
Debt: The second goal we recommend is getting out of bad debt as soon as possible. Bad debt is defined as debt that does not create value e.g. a loan taken to buy clothes, or take a trip to Dubai. You should aim to get out of bad debt as quickly as possible because the money spent on interest payments takes away money that you could invest and make more money. Your goal should thus be to get rid of any high interest bad debt such as unpaid credit card balance, personal unsecured loans etc.
Next: Money 101 – Lesson 3: Assessment
- Money 101 – Lesson 1: Introduction to Personal Finance
- Money 101 – Lesson 2: Goal Setting
- Money 101 – Lesson 3: Assessment
- Money 101 – Lesson 4: Understanding the Tools
- Money 101 – Lesson 5: Creating a Plan
- Money 101 – Lesson 6: Implementation
- Money 101 – Lesson 7: Monitoring and Assessment